The 2026 Nobel Prize in Economics has been awarded to Robert E. Hall and Michael Woodford

The two Americans won this year’s Nobel Prize for demonstrating how economic models could be reworked to reinvigorate stabilisation policies. Instead of basing their models on statistical correlations between macroeconomic variables – such as inflation, output and consumption – they chose to ground them in microeconomic principles. This approach involves understanding how the aggregate actions of individual households and firms influence the economy as a whole. The economy, explains the committee that awarded the prize, is characterised by an alternation of phases of expansionandcontraction. Ever since, almost a century ago, the economist John Maynard Keynes formulated his theories, stabilisation policies have played a central role in countering these fluctuations.

During recessions, the economy is stimulated by cutting interest rates and increasing the budget deficit , whilst the exact opposite must be done to cool down an overheating economy. However, during the oil crises of the 1970s, it became clear that Keynesian models – which determine the timing and methods of implementing policy measures – were no longer working. Instead of reducing unemployment, they triggered runaway inflation. The West experienced a decade characterised by low growth, high unemployment and high inflation. Many believed that stabilisation policies had done more harm than good and should be shelved.

A central element of the award-winning economists’ models is the assumption that households and firms act with a forward-looking perspective when making decisions regarding savings or price-setting. When governments and central banks communicate their economic policy plans, they can influence these future expectations and steer the economy in the right direction. Since their introduction, the new models have proved to be a valuable tool for managing the economic downturns that have affected us.

The prize in Economic Sciences, established in 1968 by Sveriges Riksbank, the Central Bank of Sweden, and awarded for the first time in 1969, is not formally one of the prizes established in the will of Alfred Nobel, but is awarded according to the same procedure and during Nobel Week. This year’s prize money totals 12 million Swedish kronor (approximately 1.06 million euros), regardless of whether the prize is awarded to a single individual, a small group of laureates or an organisation. Hall and Woodford will have to share it equally.